Does becoming a loan guarantor affect your credit score? Key risks borrowers and guarantors should know
Acting as a loan guarantor might be a straightforward way to help a friend, colleague, or relative secure financing during challenging economic times. However, this simple favour carries major financial implications.
It is vital to keep in mind that becoming a loan guarantor entails its own set of challenges and is far more than a mere formality. This is because a guarantor assumes full responsibility for the loan if the primary borrower fails to meet the repayment obligations.
This means the decision can have ramifications for a guarantor’s own financial health, credit profile, and future borrowing potential. Hence, this decision requires proper due diligence and consideration of all aspects before signing the agreement as a loan guarantor.
Impact on guarantor’s credit profile
As the guarantor assumes responsibility for someone else’s borrowing, the actual impact on their credit profile will depend on how the loan is reported, managed, and repaid. Missed payments or delays by the primary borrower can put the guarantor’s credit history at risk.
Shakti Sekhawat, Business Head, BharatLoan, explains this aspect in detail. “Becoming a loan guarantor can impact your credit profile, as the guarantor takes on responsibility for the borrower’s loan repayment. While timely repayments may not negatively affect the guarantor’s credit score, delayed payments or a loan default can adversely impact their credit history and may also affect their future loan eligibility. Hence, individuals should carefully assess the borrower’s repayment capacity before agreeing to become a guarantor,” Sekhawat noted.
The eventual implications can extend well beyond just credit scores themselves. Even the guarantor’s future loan applications might be rejected. It can even influence the amount they can borrow or the terms offered to them on a loan.
Raj P Narayanam, Executive Chairman, Zaggle, points out that becoming a loan guarantor is a financial commitment most people underestimate. “The loan appears on your credit report the moment you sign, impacting your debt-to-income ratio and potentially limiting your own borrowing capacity. If the primary borrower defaults, the lender comes to you first and every missed payment hits your credit score as hard as if the loan were your own. Before signing as a guarantor, ask yourself one question: Am I prepared to repay this loan in full? If the answer is anything other than yes, do not sign,” Narayanam said.
Think beyond trust before signing
Emotions and trust are two primary reasons why individuals agree to become guarantors. Still, this decision should not be made on just emotions. Having a clear understanding of the applicable terms is a must.
Kuldeep Yadhuvanshi, Business Head, Rupee112, elaborates on this aspect. “Acting as a loan guarantor is a significant financial responsibility and can have implications for one’s credit profile. If the borrower delays payments or defaults on the loan, the guarantor’s credit history and future borrowing capacity may also be affected. Before agreeing to guarantee a loan, individuals should thoroughly understand the terms, evaluate the borrower’s repayment ability and consider whether they are financially prepared to take on the repayment obligation if required,” Yadhuvanshi opined.
Rohit Mahajan, Founder & CEO, plutos ONE, adds, “A guarantor should never look at the role as simply signing a document. You are effectively taking responsibility for someone else’s debt. Before becoming a guarantor, assess whether you would personally be comfortable repaying the entire loan if the borrower stops paying.”
Becoming a guarantor should be treated with the same seriousness as applying for and taking out a fresh loan yourself. If not properly planned, such an agreement can also damage relationships beyond the guarantor’s credit score and overall credit profile.
Before signing, you should understand the loan terms, repayment schedule and consequences of default. Helping someone financially is valuable, but it should never come at the cost of your own financial stability.
